Advanced Planning Considerations For Hedge Fund General Partners

Russ Alan Prince
, ContributorI write about the creation and management of exceptional wealth.Opinions expressed by Forbes Contributors are their own.

For hedge funds there are a number of factors that translate into long-term success. Topping the list is high-quality investment performance. Hedge funds are all about alpha. However, for business success and to produce a stellar track record, hedge funds need to raise capital and they must attract and retain exceptionally talented professionals.

The management company is the operating entity that hires the fund’s professional and administrative staff. It pays their salaries and provides various benefits programs. According to Evan Jehle, a partner in the family office group at Rothstein Kass, “Very often astute general partners use their management companies to deliver programs and advanced planning solutions that nurture and retain key talent. It’s also through the management company that the general partners usually structure continuation plans.”

A number of different advanced planning solutions are attractive to general partners, including:

Using defined benefit plans.

Establishing asset protection plans.

Developing contingencies plans.

Defined benefit plans. According to Frank Seneco, a leading advanced planning specialist and president of Seneco & Associates, “There are two main benefits of using defined benefit plans. One is the ability to put money aside for the general partners and key employees that grows tax deferred. Where key employees are included, these qualified plans can be useful in helping to attract and retain them.”

“Two types of defined benefit plans that are particularly appropriate for hedge fund managers are cash balance plans and benefit-focused plans,” notes Jehle. “What’s particularly attractive about these two types of plans is they permit large contributions – thus large income tax deductions – and they can be structured to favor selected employees.”

Asset protection plans. More than ever before the wealthy – including those who might not be wealthy, but are generally perceived to be rich such as hedge fund managers – are being assaulted with frivolous and baseless lawsuits. The way to best address this problem or potential problem is to put an asset protection plan in place.

Contingency plans. Many investors have become quite concerned about continuity at hedge funds. The solution to this is to develop, implement and communicate to these investors the core characteristics of the contingency plans that have been put in place. This necessitates structuring contingency plans.

“There are two components to well-constructed contingency plans. On the one hand, there are financial considerations. These ensure that there are monetary resources available to ensure smooth transitions,” explains Jehle. “On the other hand, there are operational considerations. Here, the matter of personnel from who’s in charge to making certain requisite talent is retained or acquired.”

It’s fair to say that hedge fund general partners spend most of their professional time focused on making their funds successful. This primarily means investing well and building an enviable performance track record. This sometimes leads to overlooked advanced planning opportunities such as the ones discussed here.